March 1, 2016 11:15 am eastern

Markets rose this morning due to positive economic reports. Note that, unlike analysts in the media, I will NEVER say that markets are rising since that implies they will keep doing so and my view has always been that markets can change direction anytime. It is always okay to say that markets have risen or have fallen. In my view, it is never okay to claim that they are rising or are falling since that implies knowing the future even if only the very immediate future.

December and Q4 were weak but perhaps a bit better than expected as December had 0.2% growth. And, recall that GDP growth is (virtually) always discussed in real after-deducting-any-inflation terms. Canada’s GDP grew 0.5% in 2015. And inflation in 2015 was reported as 1.6%. That means that in nominal dollars the economy grew 2.1% in 2015 but in real dollars after deducting inflation it grew 0.5% according to these figures. A common mistake is for people to hear that GDP rose at say 2% and to conclude that this would be zero after say 2% inflation.

I have recently become aware of what I think is a major flaw in the way that the GDP growth of individual industries is reported. The problem does not affect the growth rate of the overall economy but affects the reported growth rate of individual industries.

For example the decline in GDP of the Mining, quarrying, and oil and gas extraction sector is reported as a decline of 3.2%. If one were to add back 1.6% inflation that might seem to incline that the output of the Mining, quarrying, and oil and gas extraction sector fell just 1.6%. Would that it were so!. A closer look reveals that the 3.6% was a decline as measured in 2007 chained dollars. I always assumed (oops!) that 2007 chained dollars meant basically 2007 real inflation-adjusted dollars. Instead, it means basically dollars adjusted for the specific inflation associated with this sector. It attempts to measure the activity or volume in the sector as if there was no change in prices for the output of that sector (i.e. no change in oil prices!). And certainly that is a useful number. But I don’t think the reported 3.6% decline in the Mining, quarrying, and oil and gas extraction sector in any way reflects the large decline in that sector in 2015 as measured in nominal or adjusted-by-CPI dollars. Statistics Canada experts that I talked to today acknowledged that the concept of chained dollars is very confusing.

In fairness, Statistics Canada sometimes provides the option to view this data in nominal dollars but not all tables are available that way. And, this one is not.

Overall, I believe the GDP growth figure being reported for the Mining, quarrying, and oil and gas extraction sector is extremely misleading when presented in “2007 chained dollars”.

On the Statistics Canada site there is no definition of chained dollars in their glossary’. There is a rather opaque definition of a chained index: An index which is rebased on a period to period basis, accumulated multiplicatively from a base period value. For example, the chain Fisher volume index calculates the Fisher volume index in each pair of consecutive quarters, treating the earlier quarter as the base period.